Fitch Affirms Cimento Tupi S.A.'s IDRs at 'B'

CHICAGO--(BUSINESS WIRE)--Fitch Ratings has affirmed the following ratings of Cimento Tupi S.A.
(Tupi):

--Foreign currency Issuer Default Rating (IDR) at 'B';

--Local currency IDR at 'B',

--Senior Unsecured Notes Due 2018 at 'B/RR4';

--Long-Term National Rating at 'BBB-(bra)'.

The Rating Outlook has been revised to Negative from Stable.

The Negative Outlook reflects the challenges the company faces following
the expansion of the Pedro do Sino cement plant. The construction of
this plant, which was completed during May 2013, went approximately
BRL100 million over budget. Ramp-up of the mill was hindered by
equipment malfunctions during the third quarter. As a result, the
company's net leverage for 2013 will be higher than originally projected
by Fitch. Tupi's net leverage as of Sept. 30, 2013 was 4.6x. The
expansion project increased the company's capacity to 3.2 million tons
from 2.4 million tons. Challenges faced by the company in 2014 include
increasing capacity utilization rates, which were around 56% in 2013.

Tupi has made a number of changes to its management team to face an
environment in which cement demand remains weak relative to
expectations. The performance of the new sales and financing team will
be tested during 2014, as the growth in cement demand is not anticipated
to be robust. During 2013, Brazilian cement demand grew by around 2%. At
the end of 2014, the company faces a net leverage covenant of 4.25x.
Fitch's base case shows Tupi's debt at approximately BRL581 million in
2014 from approximately BRL658 million in 2013. Fitch believes the
lenders would likely waive or amend the covenants.

Tupi's 'B' ratings reflect its small business position, high leverage
and the volatility of its cash flow generation due to the cyclicality of
the cement industry. Fitch believes the company will be able to slowly
deleverage, as operating cash flow should be begin to improve as volumes
and sales prices increase. If the company achieves volumes of around 2.2
million tons, free cash would likely turn positive, as capital
expenditures are projected to be low and dividends are not expected to
be paid.

KEY RATING DRIVERS

High Leverage and FX Risks

Tupi has maintained high leverage since it started construction on the
expansion of the Pedra do Sino plant in 2011. Tupi was forecasted to
invest BRL250 million on its expansion plan; however, overages ballooned
the amount to BRL350 million. Tupi completed its capex project in early
2013. As cash flow is freed up from capex projects, Tupi is focused on
delevering to below 4.25x by the end of 2014. Fitch believes it will be
a challenge for Tupi to meet this leverage restriction by year end.
Furthermore, Tupi is exposed to currency mismatch (FX) risks. About 60%
of its debt is denominated in USD, and 100% of its cash flow generation
is in local currency.

Weak Business Profile

Tupi's small production scale and its lack of geographic diversification
heighten the risk of its exposure to the volatility of the cement
industry. In 2013, Tupi had a 2.7% market share in the domestic market
and 5.8% of market share in the Southwestern region. As a result of its
small size, Tupi has a higher cost structure than the larger integrated
Brazilian cement producers. The strong credit profile of these
conglomerates may allow them to pressure prices during a downturn in the
industry in an attempt to sustain volumes, which would negatively affect
Tupi's cash flow and ability to service its debt.

Tight Liquidity and Refinancing Risks

Tupi's liquidity is weak. As of Sept. 30, 2013, Tupi had BRL89 million
in cash and marketable securities and BRL89 million of short-term debt.
Approximately BRL73 million of the company's short-term debt is with
local banks and is denominated in Brazilian reais. Most of this debt was
raised during 2013 and Fitch expects it to be rolled over. The levels of
short-term debt coverage as measured by cash plus free cash flow (FCF) /
short-term debt was negative at (0.9x) and (1.3x), respectively for LTM
Sept. 30, 2013 and the fiscal year ended 2012. Liquidity is projected to
remain tight over the next several years as Tupi uses cash flow to repay
debt.

Cement consumption is projected to grow by around 3% during 2014. The
outlook is more favorable in the medium- and longer-term. The expansion
of the real estate segment and infrastructure works should also favor
Tupi's operations. Nevertheless, profitability margins should remain
relatively flat, as a lot of new capacity is being added by the leading
cement producers. Tupi's end-market, which is highly oriented toward the
refurbishment and construction of homes, should not be affected
materially by the high level of infrastructure projects in Brazil, as it
is linked more with unemployment and income levels.

RATING SENSITIVITIES

A rating downgrade could result from the company's inability to reduce
its high leverage position, resulting in a covenant default or the need
to refinance. A significant deterioration in the company's cash flow
generation and operating margins due to a downward turn in the Brazilian
market and/or liquidity issues would also pressure the ratings.

Key considerations for a positive rating action or Outlook would be a
faster deleveraging process, coupled with stronger than expected volume
growth and solid operations throughout the year.

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